IJAVAL POSTGRADUATE SCHOOL
Monterey, California
THESIS
THE QUESTION OF RETIREMENT: AN EXAMINATION
OF THE FACTORS RELEVANT TO THE RETIREMENT
DECISION OF THE INDIVIDUAL
NAVAL OFFICER
by
Donald Freeman Berkebile
and
Robert David Gaudi
June 1976
Thesis Advisor:
L. Darbyshire
Approved for public release; distribution unlimited.
Thesis
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NAVAL POSTGRADUATE SCHOOL
Monterey, California
THESIS
THE
QUESTION OF RETIREMENT: AN EXAMINATION |
OF
THE
FACTORS RELEVANT TO THE RETIREMENT
DECISION OF THE INDIVIDUAL
NAVAL OFFICER
by
Donald Freeman Berkebile
and
Robert David Gaudi
June 1976
Thes
sis
Advisor: L- Darbyshire
Approved for public release; distribution unlimited.
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The Question of Retirement: An Examina-
tion of the Factors Relevant to the Re-
tirement Decision of the Individual
Naval Officer
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Master's Thesis
June 1976
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Donald Freeman Berkebile
Robert David Gaudi
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20. ABSTRACT (ConOnua an
larr antf Idantltr by bloek mmtbar)
One situation confronting a military officer is that at some
point he must retire either voluntarily or involuntarily. Under
certain conditions he may have to make a transition to a second
career. Given this transition, substantial advance planning
should be undertaken to determine, from the range of retirement
opportunities available, the optimum time at which to retire in
order to achieve his personal goals. Particular factors that
FORM
1 JAN 73
(Page 1)
DO
1473 EDITION OF t NOV SB IS OBSOLETE
S/N 0102-0J4-6601 I
UNCLASSIFIED
SECURITY CLASSIFICATIOM OF THIS PAGE (Whan Dmia Km
UNCLASSIFIED
fliCVJl'lTv CLASSIFICATION OF TmiS c.»GE'X^«n Dftm Enlmrod
the potential retiree should consider prior to electing voluntary
retirement were developed. A present value analysis was used to
present various financial options related to the officer's
marketability in the civilian sector, his military career, and
personal goals. No decision on the most opportune retirement
point was reached or intended. It was concluded that the
voluntary retirement decision is completely individual and not
clear cut and that extensive planning is required prior to re-
tirement.
DD Form 1473 UNCLASSIFIED
1 Jan I J
S/N 0102-014-G601 security classification of this PAserwb.r o.r. En„r.d)
The Question of Retirement: An Examination of the
Factors Relevant to the Retirement Decision of
the Individual Naval Officer
by
Donald Freeman Berkebile
Lieutenant Commander, Urfited States Navy
B.S., U.S. Naval Academy, 196 6
and
Robert David Gaudi
Lieutenant, United States Na'</y
B.A. , Southern Illinois University, 1968
Submitted in partial fulfillment of the
requirements for the degree of
MASTER OF SCIENCE IN MANAGEMENT
from the
NAVAL POSTGRADUATE SCHOOL
June 1976
^•?540
ABSTRACT
One situation confronting a military officer is that at
some point he must retire either voluntarily or involuntarily.
Under certain conditions he may have to make a transition to
a second career. Given this transition, substantial advance
planning should be undertaken to determine, from the range of
retirement opportunities available, the optimum time at which
to retire in order to achieve his personal goals. Particular
factors that the potential retiree should consider prior to
electing voluntary retirement were developed. A present value
analysis was used to present various financial options related
to the officer's marketability in the civilian sector, his
military career, and personal goals. No decision on the most
opportune retirement point was reached or intended. It was
concluded that the voluntary retirement decision is completely
individual and not clear cut and that extensive planning is
required prior to retirement.
TABLE OF CONTENTS
I. INTRODUCTION 8
A. BACKGROUND 8
B. STATEMENT OF THE PROBLEM 9
C. THESIS OBJECTIVES AND SIGNIFICANCE OF
THE ANALYSIS : 10
D. INVESTIGATIVE PROCEDURES 14
II. EVOLUTION OF THE UNIFORMED SERVICES RETIREMENT
SYSTEM 16
A. REVOLUTIONARY WAR VINTAGE 16
B. POST REVOLUTIONARY WAR 16
C. A PERIOD OF TRANSITION 16
D. AFTER THE CIVIL WAR 17
E. TOWARD A MODERN SYSTEM 18
F. OFFICER PERSONNEL ACT OF 1974 : 18
G. RECOMPUTATION OF RETIRED PAY 19
H. UNIF0R:4ED services PAY ACT OF 1963 20
I. THE CURRENT SYSTEM- 20
III. CAREER PATTERNS AND PROMOTION PROSPECTS 22
A. PROMOTIONAL OPPORTUNITY 22
B. CAREER PATTERNS 24
C. MILITARY FUTURE 29
IV. PERSONAL FINANCIAL SITUATION 31
A. INTRODUCTION 31
B. SOURCES OF INCOME 31
C. ACTIVE DUTY INCOME 34
D. RETIRED PAY 34
E. TOTAL RETIRED PAY 35
F. PRESENT VALUE 37
G. PRESENT VALUE OF TOTAL RETIRED PAY 40
5
H. ADDITIONAL SOURCES OF INCOME 44
I. CIVILIAN EMPLOYMENT 45
J. OTHER SOURCES OF INCOME 50
K. FINANCIAL PROTECTION 52
L. SURVIVORS BENEFITS 52
M. DEPENDENCY AND INDEr4NITY COMPENSATION 5 3
N. EXPENSES 55
0. EDUCATIONAL COSTS 55
P. LOCATIONAL EXPENSES 59
Q. HOUSING EXPENSES 60
R. TOTAL FUTURE INCOME STREAM 60
S. THE HALF PAY FALLACY 66
V. RETIREMENT ADJUSTMENT 73
VI. GENERAL ECONOMIC CONDITIONS 77
A. GROSS NATIONAL PRODUCT (GNP) 78
B. CONSUMER PRICE INDEX (CPI)- 79
C. UNEMPLOYMENT 79
D. CORPORATE BENEFITS 80
E. ADDITIONAL INDICATORS 81
VII. MARKETABLE SKILLS AND CIVILIAN EMPLOYMENT
OPPORTUNITIES 84
A. ADVANCED DEGREES 84
B. MILITARY EXPERIENCE TRANSLATION 86
C. CIVILIAN EMPLOYER VIEW OF MILITARY RETIREES — 87
VIII. LIMITATIONS AND CONCLUSIONS 90
APPENDIX A 96
APPENDIX B 104
BIBLIOGRAPHY 10 6
INITIAL DISTRIBUTION LIST 110
LIST OF TABLES
I. MANDATORY RETIREMENT 19
II. ARMED FORCES ACTIVE DUTY PAY SCALE 32
III. MONTHLY RETIRED PAY FOR COMMISSIONED OFFICERS 33
IV. CUMULATIVE VALUE OF LIFETIME RETIRED PAY 36
V. PRESENT VALUE OF CUMULATIVE RETIRED PAY (5%) 41
VI. PRESENT VALUE OF CUMULATIVE RETIRED PAY (8%) 4 2
VII. AVERAGE ANNUAL INCOME BY RETIREMENT AGE AND GRADE — 4 8
VIII. ESTIMATED SECOND CAREER AVERAGE MONTHLY INCOME 49
IX. INSTITUTIONS OF HIGHER LEARNING - AVERAGE
PROJECTED COSTS 1976 - 1981 58
X. MONTHLY RETIRED PAY RESULTING FROM SECOND CAREER
INCOME 6 3
XI. PRESENT VALUE OF TOTAL FUTURE INCOME STREAM (5%) 64
XII. PRESENT VALUE OF TOTAL FUTURE INCOME STREAM (8%) 6 5
XIII. SECOND CAREER INCOME REQUIRED TO PRODUCE FINANCIAL
INDIFFERENCE BETWEEN EARLY AND LATE RETIREMENT
(5%) 6 8
XIV. SECOND CAREER INCOME REQUIRED TO PRODUCE FINANCIAL
INDIFFERENCE BETWEEN EARLY AND LATE RETIREMENT
(8%) : 6 9
I. INTRODUCTION
Active duty military personnel have at their disposal one
of the most generous of all retirement programs. Not only does
the Uniformed Services Retirement System provide for a minimum
retired pay of 50 percent of active duty base pay, it also
provides this compensation after only 20 years of active duty
service. An option to retire with commensurate lifetime in-
come stream at the age of 42 or 4 3 may become particularly
attractive to a naval officer as he potentially has available
to him a second career covering a span of perhaps 2 3 or more
years .
A. BACKGROUND
Assuming that a military officer remains on active duty
for_ a minimum of 20 years, he is faced with a decision regard-
ing the point at which he should retire. That is, should he
remain on active duty until he has completed 30 years (assuming
he is eligible to do so , i.e. , not mandatorily retired prior
to 30 years), or should he retire at some point after 20 and
prior to 30 years of active duty service?
If a naval officer should select or be forced to retire at
anytime prior to 30 years of active duty service, he will not
receive the maximum retirement benefit of 75 percent of his
monthly base pay. On the other hand, if he chooses to retire
prior to 30 years, he may utilize the difference between retire-
ment prior to 30 years and retirement at 30 years as additional
8
time in pursuit of a second career. As Morris Janowitz points
out
Military service for both officers and enlisted
personnel is becoming more and more the first
phase in a two-phase career in which the soldier
leaves the military service in midcareer for
civilian employment. [Janowitz, 1964, p. 24]
The earlier one retires prior to the 30 year point, the
more years one has available for a second career. In fact, it
could be considered not only desirable but necessary to pursue
a second career if one retires far enough in advance of the 30
year point. This is because retirement benefits from an early
retirement alone may not sustain a family without supplemental
income, especially if that family has a desire to maintain
their previous standard of living. In economic literature this
is referred to as the 'Duesenberry effect.' Duesenberry
theorized that.
Reductions in income do pose problems for consum-
ers and the hypothesized behavior that they will
try to retain old habits for as long as possible
is very plausible. It is not easy to break old
habits, especially when one is asked to give up
consuming goods to which one has grown accustomed.
[Campagna, 1974, p. 138]
B. STATEMENT OF THE PROBLEM
The decision the naval officer must make may appear to be
relatively uncomplicated; he can either retire or remain on
active duty. Yet, this decision is not that simple or devoid
of complications as there exist numerous factors which should
influence his decision.
The potential retiree thus may have a difficult choice to
make, one full of uncertainties and ambiguities and shaped by
outside influences. It is our contention that many naval offi-
cers approach the retirement decision without proper planning
and without a full or adequate realization of the relevant fac-
tors worthy of careful consideration when making their choice.
Stated simply, many naval officers must make a vitally impor-
tant decision for which they are often completely unprepared.
C. THESIS OBJECTIVES AND SIGNIFICANCE OF THE ANALYSIS
Traditionally, a person who elects to retire earlier than
required does so for one of two reasons: he or she either
wants to change jobs to improve the chances for promotion (ad-
vancement) , or simply wishes to cease working altogether. How-
ever, there are people in civilian employment as well as the
military who once at or nearing the higher echelons of manage-
ment find their own personal needs (goals) are not being satis-
fied. [Damroth, 19 75] What happens to them after they leave
one career? What criteria are relevant to this career change?
What adjustments are necessary and how will advance planning
affect the situation?
In recent years more and more naval officers are leaving
the service after completion of the minimum required retirement
eligibility period - this correlates with what is beginning to
be called mid-career job change in the civilian sector. Mid-
career change refers to completing and terminating one entire
career in the middle years, and then entering into a second
and often completely different career. [Driskill, 1975] This
mid-career job change can be voluntary, in which the individual
terminates his current career for a variety of reasons, usually
10
related to the need to acquire increased reward and satisfac-
tion from the job; or involuntary, in which the individual is
forced out of his present occupation. Generally, the major
reason for a voluntary change is "to do what I want to do,"
(i.e., self-actualization) coupled with increased pay, promo-
tional opportunity, recognition, and to alleviate personality
clashes with supervisors.
The post World War II political and diplomatic environment
in conjunction with rapid technical advancement changed the re-
quired skills of military officers, the size of our military
establishment, and our officer personnel management policies.
The typical military officer now enters active duty with a
minimum of a bachelor's degree, additionally, military officer
skills and training have become more technical and business
related; thus the marketability of ex-military officers in the
civilian sector has substantially increased. In many cases
there is now little or no significant difference in the job
functions of military and civilian occupations.
New promotional policies have been instituted to assure a
young, dynamic corps of officers who are promoted on a "best
fitted" criteria. The possible involuntary retirement
terminates an officer's military career at an age wherein
true retirement would not be desirable or financially practical
in most cases. With this "up or out" management policy very
few officers remain on active duty beyond twenty years of
service. Therefore, in contrast to the past, when most
career officers felt they would not be active participants in
11
the labor market upon retirement, they are, due to their age,
increased life expectancy, and financial needs, forced to begin
a second career in the civilian market.
An officer who has served his mature lifetime in the mili-
tary naturally faces the mid-career change to civilian employ-
ment with some trepidation. He is highly confident of his
knowledge and ability, and is positive that he can make a
viable contribution to society as a civilian, just as he did
as an officer. Still, the prospect of leaving the military at
such an early date will force the officer to face several major
problems including: the standard of living he can expect after
retirement, the transferability of his military skills to the
civilian job market, the severity of the psychological adjust-
ment from military to civilian life, and the possibility of a
loss of economic and/or social status.
There are certain transitional problems experienced by
retirees including financial assessments, life insurance re-
quirements, and survivors' benefits. To date, the literature
and research available concerning the mid-career job change of
military officers has concentrated on these difficulties and
on whether they require that assistance be given through re-
visions in existing laws or the establishment of special
counseling programs. Our research will concern the major
factors that an officer should consider well in advance of
reaching retirement eligibility.
After completion of twenty years of service, an officer
faces a decision point on the length of the remainder of his
military career. Normally, he can retire any time after this
12
point. If he does not elect voluntary retirement, he faces
involuntary retirement at twenty-six years of service if not
selected for promotion to 0-6 or at thirty years of service if
he is not selected for flag rank. The average age of an offi-
cer with twenty years of service is 42-4 3 years while a thirty
year retiree is normally 52-53 years old. Thus, he is too
young to be content with inactivity and his financial needs
usually far exceed his retirement pay. Also, this period
often coincides with the peak financial demands of education
for his children. [Lenz, 1968]
The normal situation confronting a military officer is that
at some point he has to make a transition to a second career.
Given this transition, substantial advance planning should be
undertaken to determine, from the range of retirement oppor-
tunities available, the optimum time at which to retire to
maximize his expected future income and/or other goals.
From research, it is very evident that most of the planning
for retirement occurs after the decision has been made to re-
tire. [Kelly, 1961] Furthermore, the planning thus performed
is incomplete and tends to concentrate mainly on the urgent
need to supplement the retirement pay. It is often too late
then to adjust the time of retirement to optimize the situa-
tion. It is difficult to understand how military officers
accustomed to working in an organized systematic manner can
accept entering into retirement with so little planning and
forethought. A long range second career plan should be deve-
loped and tailored to the individual officer years before he
13
reaches retirement eligibility and should include a more com-
prehensive viewpoint.
We propose that the potential retiree should consider at
least the following factors: his military career and promo-
tional prospects, his personal financial goals and situation,
the adjustment to military retirement, the nation's general
economic situation, his marketable skills and civilian employ-
ment opportunities, and his individual/personal goals. LTCOL
Thomas A. Kelly, Chief of the Retired Activities Unit of the
Army Adjutant General's Office, summed up the need for retire-
ment planning.
The first step in the solution of any problem is
recognition that the problem exists. In order to
make a smooth and orderly transition into the re-
tirement life of tomorrow, the military man of
today must take a periodic inventory of himself
and identify those areas in his entire makeup
where problems exist or where they may develop.
In so doing, he is laying the groundwork for his
future - not only the intermediate future of re-
tirement but also the immediate future of his
military career. [Kelly, 1961, p. 20]
For purposes of simplification and personal interest, we
will consider the relevant factors in the decision when to
elect retirement from the point of view of two male naval
officers - one an lllX, surface warfare officer, and one a
131X, avaition officer.
D. INVESTIGATIVE PROCESS
A search of the literature was conducted in order to gain
background information and source data. The discovery was soon
made that although numerous studies had been undertaken re-
garding retirement and retirement related topics, few had
14
been conducted which dealt with the retirement decision per se.
[Greenamyer , 1974; Johnson, 1971; Holladay, 1975, are examples.]
Previous studies dealing with the retirement decision were
primarily concerned with the financial aspect of the decision
and tended to give little or no consideration to other factors
relevant to the decision. The bulk of this material resulted
from the efforts of other military officers in the form of un-
published research papers, theses and doctoral dissertations.
In addition to the literature research, various military
retirement associations were contacted by mail. Recent informa-
tion on certain statistics was unavailable through normal re-
search, and, as time constraints precluded a survey of the
magnitude required for any reasonable degree of credibility or
statistical significance, it was hoped one or more of the
retirement organizations could provide the needed information.
However, only The Retired Officers Association (TROA) provided
any substantial assistance. TROA conducted surveys of its
membership in 1972 and 1975 concerning, among other things,
their post-retirement employment and financial situations. The
results of the 1975 indepth survey have not been completely
assimilated to date.
15
II. EVOLUTION OF THE UNIFORMED SERVICES RETIREMENT SYSTEM
Before considering the situation with which the naval offi-
cer of today is confronted, it is in order to review the manner
in which the current retirement system evolved.
A. REVOLUTIONARY WAR VINTAGE
Military retirement practices of one form or another can
be traced as far back as the Revolutionary War. During this
era, one-half pay for life was promised to officers remaining
on active duty until the end of the war. Some states provided
that officers might elect to receive a lump sum payment of
five years full salary, either in money or in 6 percent
interest-bearing securities at the pleasure of the Congress in
lieu of half-pay for life. In addition, one-half pay for life
for the length of disability was promised to all veterans dur-
ing this era as compensation for disability incurred in service
B. POST REVOLUTIONARY WAR
After the Revolutionary War numerous retirement and dis-
ability retirement plans were initiated and enacted by Congress
to cover various circumstances. None, however, was permanent
in nature or designed to provide more than temporary or condi-
tional retirement benefits.
C. A PERIOD OF TRANSITION
The period 1812-1861 was a transition period where a dis-
ability retirement plan was in effect but not a non-disability
16
retirement plan. There was a distinct need for a non-disability
retirement plan during this time period as many officers and
soldiers serving on active duty could not qualify for dis-
ability retirement yet were not fit to remain on active duty
in field service.
This particular phenomenon gradually produced the evolution
of the "physical incapacity due to age" concept which served
to rid the services of those personnel who had served 30 to 50
years and were simply too old to fight a vigorous war. This
eventually led to the "length of service" retirement and pen-
sion concept. This concept was designed to remove older person-
nel and make room for younger, more vigorous personnel. "An
Act for the Better Organization of the Military Establishment"
was passed in 1861. The passage of this act helped establish
the "length of service" retirement concept.
D. AFTER THE CIVIL WAR
The post Civil War period saw an increasing development of
the "length of service" retirement concept. The option to re-
tire after 30 years of active service began in 1870 and manda-
tory retirement for failure to be promoted was initiated by
the Navy in 1899, a practice which remains in effect to this
day . __^-
This is basically the ^up or out" 'concept which dictates
that if an officer is not promoted he will be forced out of the
service. This eliminates those personnel who do not perform up
to current standards and allows for the upward migration of
younger officers.
17
E. TOWARD A MODERN SYSTEM
A significant point worth considering is that prior to
World War II a military line or field officer was considered a
professional military man who really had no skills transfer-
able to civilian employment. He was proud of his abilities
and his profession and he was not particularly motivated to
retire prior to fulfillment of a lifetime career. This point
of view began to change with the development of the modern
retirement system.
F. OFFICER PERSONNEL ACT OF 194 7
Current retirement practices are based upon laws passed
between 1946 and 1949. One such act was the Officer Personnel
Act of 1947. This Act was designed to remove older officers
from the active ranks and prevent them from achieving positions
of high authority simply thru seniority.
Basically, the Act provides for retirement pay based on
length of service. Regular or reserve officers may be retired
upon application and approval by their respective service
secretaries after they have completed 20 years of active serv-
ice, ten of which are as commissioned officers. The most
significant aspect of the Act is that regular officers, except
flag or general officers, are subject to mandatory retirement
if they are not promoted after serving a certain number of
years in grade. These points of mandatory retirement vary with
the individual services and ranks. For the Navy, mandatory
retirement is imposed upon all officers according to Table I.
18
0-4 (LCDR)
0-5
0-5 (CDR)
0-6
0-6 (CAPT)
0-7
TABLE I
MANDATORY RETIREMENT
Rank Failed to select for Retired at
20 yrs of active serv.
26 yrs of active serv.
30 yrs of active serv.
0-7 (RADM) and above may serve up to 35 years or more, or, in
certain cases to age 62.
Thus, with the passage of the Officer Personnel Act of
1947, the officer was faced with the possibility of being
forced to retire at 20 years of service or at certain predeter-
mined points after 20 and prior to 30 years of service. No
longer was an officer reasonably assured of being retained on
active duty for 30 or perhaps even 40 years.
G. RECOMPUTATION OF RETIRED PAY
The Act of May 20, 1958, which became Public Law 85-422,
brought to a halt the practice of recomputation of retired
pay. Recomputation of retired pay (RECOMP) was the practice
whereby retired pay was geared to increases or decreases in
active duty pay. If active duty members received a percentage
increase in pay, retired members would receive the same per-
centage increase thus maintaining an income growth potential
capable of at least offsetting some of the effects of infla-
tion.
RECOMP was generally in effect from the First General Re-
tirement Law in 1861 to the Joint Service Pay Act of 1922.
RECOMP was again started in 192 6 and continued until 1 June 1951
19
The end of RECOMP constituted a significant blow to re-
tired service personnel as it effectively permitted their re-
tired pay to be eroded by inflation. No buffer against infla-
tion was provided to enable a retired pay check to maintain a
reasonably constant purchasing power.
H. UNIFORMED SERVICES PAY ACT OF 196 3
Offsetting the effects of the 1958 Act was the Uniformed
Services Pay Act of October 2, 1963 (Public Law 88-132) . This
Act tied adjustments to military retired pay to changes in
the Consumer Price Index (CPI).
Other than the discontinuation of RECOMP and the institu-
tion of the CPI-tied retired pay increase, no major changes to
the retirement laws have taken place in recent years.
I. THE CURRENT SYSTEM
Under retirement laws currently in effect, members of the
military service first become eligible for retirement after 20
years of active duty service. This usually equates to the
early to mid-forties for most officers.
Retirement pay at twenty years of service is computed at
50 percent of the individual's active duty base pay at retire-
ment. This retirement pay increases at a rate of 2-1/2 per-
cent per year to a maximum of 75 percent of the base pay at
thirty years.
Over the years all the services have grown in size and
complexity. Personnel have grown with the services to the
point where not only do certain service specialties exist al-
most directly transferable to civilian jobs but the typical
20
officer is now more capable of filling positions in the civilian
community closely resembling what he does or did in the mili-
tary. Thus, it is now commonplace for the military officer to
retire after only 20 years of active duty service to find suit-
able employment in the civilian community. Prior to World War
II he might not have considered retiring prior to thirty years
of active duty service.
Military retirement today is an extremely attractive plan
to one able to take advantage of it. It was partially designed
to compensate for the comparatively low wages previously paid
to service personnel. Now, as a result of the significant
military wage increases in the past ten years, the current plan
ranks high on the scale of retirement plans in the U.S.
21
III. CAREER PATTERNS AND PROMOTIONAL PROSPECTS
Published career patterns and promotional opportunities in
the Navy have always been directed at the aggregate rather than
the individual. Although no specific qualifications and cri-
teria are formally established for promotion, certain experi-
ence and qualifications receive more emphasis than others.
Some specific qualifications have become virtual prerequisities
for subsequent assignments, especially in the operational
billets leading to aircraft squadron or ship command. From the
view of promotional prospects the real significance of particu-
lar past billets, qualifications, experience, and performance
is how an individual compares relative to the aggregate of his
contemporaries. Selection boards are charged with selecting
the "best suited" officers to fill projected needs and require-
ments from a particular group of candidates.
A. PROMOTION OPPORTUNITY
1. Recent promotion opportunity (percent) for officers in
the primary zone of consideration .
Selection to Fiscal Year 1975 Fiscal Year 1976
111X/131X designator* 111X/131X designator*
LCDR (04) 66.7%/66.1% 72.0%/59.0%
CDR (05) 52.9%/56.8% 62.8%/63.7%
CAPT (06) 51.0%/47.5% 48.2%/46.9%
FLAG (07) 1.5% 1.5%
*Indicates Surface Warfare Officers and Aviation Pilot Officers,
respectively.
22
2. Defense Officer Personnel Management Act (DOPMA) pro -
posal .
The DOPMA proposal was introduced in legislative form
to Congress in May 1975 and contains the statutory authority
to provide a uniform promotion and officer strength management
system for the armed services. DOPMA would revise or eliminate
over 300 actions of present law and modify others. It is not
really a radical change, but more designed to clear up exist-
ing differences between the services and the management of male
and female officers. A major change proposed is in the tenure
(involuntary retirement provisions) of 0-4 's, 0-5 's, and 0-6 's.
The service secretaries would have the authority to manage the
officer grade structure and to insure adequate promotional
opportunities exist to retain a viable promotion system through
the convening of continuation boards for 0-4 's, 0-5 's, and 0-6 's,
who have twice failed selection to the next higher grade.
These boards would select a limited percentage of the subject
officers for involuntary retirement prior to the normal manda-
tory retirement points. An officer would only face one continua-
tion board for each grade. The characteristics of the DOPMA
promotion system are shown in Figure 1.
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under DOPMA are essentially the same with the DOPMA percentage
slightly higher due to the inclusion of above and below zone
projected selectees. Another major difference in the DOPMA
proposal is in the promotion timing or promotion flow points.
Over the last few years the Navy has increased the intervals
between promotions and is approaching those in the DOPMA
23
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proposal. Whereas an officer previously could expect to be
selected for Captain (0-6) prior to completing twenty years
of service, he now will have approximately twenty-two years of
service before selection.
The selection criteria for Captain are useful to the
individual Lieutenant Commander or Commander in evaluating his
potential for selection and necessary career path to achieve
selection. The published selection criteria for the grade of
Captain in Fiscal Year 1975 were in summary [SUPERS, 1975] :
A. Potential of the grade of Captain
B. Past performance
1. Responsibility of assignments
2. Original contributions
3. Professional reputation'
C. Breadth of Experience
1. Command or equivalent
2. Joint/large staff duty
D. Proven Combat Ability
E. Personal qualities
1. Imagination
2. Versatility
3. Leadership
4. Interpersonal relationships
5. Human goals contributions
F. Education
G. Operational Technical Managerial Spectrum
1. Subspecialty development
H. Special value to the service
25
I. POW experience
J. Age
B. CAREER PATTERtSlS
1. Figures 2 and 3 are the current career patterns (pro-
fessional development paths) for aviation and surface warfare
officers respectively as promulgated by the Officer Distribu-
tion Division of the Bureau of Naval Personnel. The horizontal
axis represents to 100 percent of the community as read from
left to right, while the vertical axis is years of commissioned
service. These are not rigid paths, but the current patterns
in which the majority of officers fall.
2. One significant point that stands out in both tables
in conjunction with the perception of most 0-4 and 0-5 avia-
tion/surface warfare officers is that as seniority and rank
increase the operational tours begin to disappear in favor of
subspecialty, major staff, and Washington, D. C, billets.
The authors often read and hear the opinion expressed by offi-
cers that after the realistic opportunities for command at
sea have been replaced by pressure intensive desk billets,
coupled with long working hours, the fun and really rewarding
billets are gone. Hence, after completing a Commander command
tour, some officers feel that a military career is no longer
inviting.
These career patterns are complex, ever changing, and
non-formal guidelines for the individual and the Bureau of
Naval Personnel. Although no official restrictions are placed
on the route an officer may choose to follow, historical
26
:apt
CDR
LCDR
LT
Figure 2
AVIATION OFFICER PROFESSIONAL DEVELOPMENT PATH
" ¥ ' t5Q ,75 100
26
24
CMD
DEEP
HDRAFTI
22
20
13
16
14
12
10
MAJ
SHORE
MAJOR SHORE STAFF
WASHINGTON
SUBSPECIALTY
SENIOR SERVICE
COLLEGE
SHI?
DE?T
HD
CVW
CMD
SQUADRON CO
SQUADRON XO
READINESS TRA I N I NG
SQUADRON DEPT HD/SHIP/SEA STAFF
READINESS TRAINING
JR SERVICE COLLEGE
PG UTILIZATION
SHORE STAFF
SQUADRON/SHIP/SEA STAFF
FLIGHT TRAINING INSTRUCTOR
SHORE STAFF
PG SCHOOL
SQUADRON
READINESS TRAINING
FLIGHT TRAINING
27
Figure 3
SURFACE WARFARE OFFICER PROFESSIONAL DEVELOPMENT PATH
25 50 7p 100
24
22
20
16
14
12
-iO
5th SHORE
SUBSPECIALTY"
MAJOR SHORE STAFF
SHORE COMMAND
POST
CO STAFF
4th SHORE
CDR COMMAND
OTHESi
SEA
SUBSPECIALTY
WASHINGTON
SERVICE COLLEGE
POST
Ko stafu
3rd SHORE
SUBSPECIALTY
WASHINGTON
MAJOR SHORE STAFF
LCDR XO/CO
SEA STAFF/DEPT HEAD
2nd SHORE
SPLIT TOUR TO DEPT HEAD
(SECOND SHI? TYPE)
PC SCHOOL(NON TECH)
SHORE STAFF
JR SERVICE COLLEGE
?G UTILIZATION
DEPARTMENT HEAD
DEPT HEAD CSE SWO SCHOOLS CMD
OTHER AFLOAT
Ist SHORE STAFF
PG SCHOOL (TECH CURRICULA)
FIRST SEA, TOUR
DIVISION OFFICER LEVEL
(BASIC SWO QUALIFICATIONS)
BASIC CSE SWO SCHOOLS CMD
28
promotion statistics indicate that unless an officer follows
the general pattern he will be at a serious disadvantage when
competing for promotion with his peers. This situation is
compounded since every major career milestone is controlled
by some form of formal selection screening process.
C. MILITARY FUTURE
After periodically reviewing the particular career pattern
and accompanying promotional prospects, an officer should re-
define or reaffirm his own military career goals. The signifi-
cance of serving in operational billets for career development
is well known as is their necessity for future promotion.
Assignments to shore and staff billets are more complex and an
area where the individual officer can substantially influence
his assignment based on his personal goals.
Historically, billets closer to the higher levels of
decision-making — especially in Washington, D. C. — have been
regarded as more significant and career enhancing. However,
education has always been a good bet whenever the opportunity
arises. A prime objective of an officer's long range career
plan should be to optimize his qualifications and skills for
post-military employment. Often the opportunity arises to en-
hance both his military career and future civilian market-
ability at the same time.
Obviously, while on active duty the officer should not pur-
sue any actions which might degrade his military performance of
duty. How his personal goals and priorities mesh with poten-
tial military assignments is an important consideration. Does
29
he want a more stable and orderly family life? Does he vie for
any billet anywhere that will improve his chances for the
earliest future promotion? Does he desire to continue a mili-
tary career as far as possible, but prefer to serve in a
particular location or not at a particular location? After
determining his personal priorities in relation to his mili-
tary future, the officer must plan the route and type of bil-
lets he desires for the remainder of his military career. How-
ever, he must also be ready to accept the risks and hazards,
such as non-selection for promotion, while following his
career plan.
The second career portion of his plan which should be deve-
loped and integrated with his military career plan.
To be successful, must provide for and include
the following ingredients, all of which are
interrelated: knowledge of civilian job
opportunities; identification of reasonably
attainable positions which would satisfy his
life's goal; preparation to enhance qualifi-
cations for job objectives; and preparation
for and the conduct of an effective job search.
[Vick, 1974, p. 3]
30
IV. PERSONAL FINANCIAL SITUATION
A. INTRODUCTION
Perhaps the area of greatest concern to the potential re-
tiree is that of his subsequent financial situation.
Having spent a minimum of 20 years on active duty the po-
tential retiree has probably become accustomed to a secure and
rather predictable income. Based on this income he has estab-
lished certain patterns of spending which have allowed him to
enjoy a particular standard of living.
With retirement comes the probability of an income that is
different, either greater or less than, that available during
active duty. To maintain the same standard of living, the
retiree will be forced to either rearrange his spending
priorities and amounts, or establish an additional source of
income, or both.
Some of the potential income sources that relate to the
retired naval officer and his efforts to maintain the standard
of living to which he has become accustomed are the concern of
this chapter.
B. SOURCES OF INCOME
We shall begin with income sources in the form of active
duty pay and retired pay. For example, what is the retired
pay an officer could expect if he chose to retire at a certain
point in his career? Tables II and III show active duty pay
and non-disability retired pay as of 1 October 1975, respective-
ly-
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C. ACTIVE DUTY INCOME
It should be noted that there are pay increases associated
with longevity that occur at different points of service for
different ranks. Commanders can expect a raise at 22 years
and Captains a raise at 22 and again at 26 years. It should
be noted also that there are no pay increases attributable to
longevity for any rank after completion of 26 years of service
and that different ranks reach their respective maximum pay
levels at different points of years service. For example, an
0-4 has already reached his maximum pay at 18 years while 0-5 's
and 0-6 's reach their maximum pay points at 22 and 26 years,
respectively.
D. RETIRED PAY
In Table III monthly retired pay is shown to increase for
each additional year an officer remains on active duty past
the 20 year point. After the 26 year point this increase is
due solely to military retirement law which stipulates one-
half base pay at 20 years increasing at 2-1/2% per year until
a maximum of 75% of base pay is reached.
The pay increase and pay maximization points which are due
to longevity are also depicted in Table III. The large pay
increases that occur for the 0-6 at 22 and 26 years are clear-
ly reflected in retired pay when moving from over 21 to over
22 years service and from over 25 to over 26 years service.
If an officer were to study Table III and attempt to make
a decision regarding at what point in his career he should
retire (based entirely on the information in Table III), he
might make any of several choices depending on his point of
34
view. An 0-6 could feasibly choose the 26 year point rather
than the 25 year point because the 26 year point pays $159 per
month more than does the 25 year point while requiring only
one additional year of service. On the other hand, the same
officer could conceivably choose the 26 year point over the
2 7 year point because remaining for the additional year only
increases his gross retirement pay by $80. The move from 25
to 26 years produced twice that amount.
The same 0-6 might have a different point of view. He
might decide that he has worked very hard to get where he is
and that he not only wants but deserves the maximum retirement
pay check obtainable. This officer would then choose to re-
main on active duty for 30 years, the maximum for an 0-6. He
would then receive $1,820 per month in retirement pay.
This type of reasoning would seem perfectly logical to
some people. There are, however, certain other factors which
must be considered and which prove the inadequacy of the
previous evaluation.
E. TOTAL RETIRED PAY
Consider, for example, how much an officer could expect
his monthly retirement check to amount to in total over the
remainder of his life, i.e., the cumulative value of his re-
tired pay received over a lifetime. This information was
calculated by multiplying yearly retired pay times the number
of years to mortality and is presented in Table IV. As ex-
pected, the large active duty pay increases experienced by the
0-6 at 22 and again at 26 years of service are also reflected
in this table. These increases now become more significant
35
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36
over the long term. For the 0-6, the rationale of remaining
on active duty from 25 to 26 years of service can now be seen,
as this additional year accumulates to $32,000 over a life-
time. On the other hand, remaining on active duty from 2 6 to
27 years results in an increase of only $8,000.
The 0-6 who remains on active duty until completion of 30
years in order to reap the maximum monthly 0-6 retirement
benefit of $1,820 may be doing himself an injustice. He could
retire 1, 2, or 3 years earlier and accumulate more total re-
tired pay because of the decrease which begins after year 28.
Is it better to retire after 30 years and receive $1,820 per
month, or is it better to retire after year 27 and receive
$183 less per month but $1,000 more in total?
This is a question that only the individual officer can
answer and he should not even attempt to answer it without the
benefit of a much broader information base. A complete analy-
sis of the retirement decision requires the review of numerous
variables. The cumulative value of lifetime retired pay
served to point out just one aspect of how time, as a factor,
can influence the retirement decision. The time factor re-
quires further consideration.
F. PRESENT VALUE
It is true that, as in Table IV, when one considers a
monthly wage over an extended period of years, it takes on
new significance. The monthly wage can be viewed as a single
sum to be received over a lifetime rather than an amount re-
ceived periodically at regular intervals in the future.
37
Looking forward to the reception of $100 per month for the next
30 years can be meaningless to many people. Consideration of
this annuity of $100 as a single amount, $36,000 ($100 x 12
months x 30 years) achieves more meaning. The series of pay-
ments compressed into the single amount of $36,000 allows
greater understanding and it is much more manageable.
This is a legitimate and logical approach to take when con-
sidering the receipts of payments over time; however, to be
complete and conceptually correct, this method must account
for the time value of money.
Present value is a means of accounting for the time value
of money. Present value works on the assumption that $1 re-
ceived at some time in the future is not worth as much as $1
today. That is, an amount of money that can be invested today
is more valuable than an equal amount that will be available
at some future time. This is because the money available today
can be utilized to do any number of things, including earn
still more money, whereas money that is not available today
cannot. A dollar available today can be invested so that it
is worth more than a dollar in the future. Or, from another
point of view, receiving $1 one year from now denies one the
opportunity to earn interest on that $1 for that year.
The present value concept involves three factors: a rate
of return (interest rate) , an amount of money, and a period of
time. Given these three factors one may take any amount of
money to be received at any time in the future, either in lump
sum or in periodic payments, and 'discount' this future amount
at a given interest (discount) rate in order to arrive at a
38
present value. An amount of (A) dollars to be received (n)
periods from now is worth how much today at interest rate (i)?
This is called 'discounting' and is much the same as inverse
compounding of interest or deducting interest in advance.
For example, if one were to receive $10,000 ten years from
now, what would that $10,000 be worth today at 8% interest?
This is the same as asking what amount must be invested today
at 8% in order to compound to $10,000 in 10 years. Using the
present value formula of
P = —'
(i+i)"
the amount required can be found to be $4632.
The present value concept can also be applied to annuities
(amounts paid per period) as well as to lump sums. The present
value concept can thus be seen to allow us to look at a future
stream of payments over a long period of time and see this
amount of money as an equivalent amount today. The present
value concept allows us to achieve a new perspective which at-
taches a more reasonable and meaningful value to future pay-
ments .
It should be understood that the present value concept and
that of discounting is not the same as inflation. Inflation
refers to a rise in the average price of currently produced
goods and services. [Bach, p. 89] The decrease in the value
of a dollar with an increase in time, due to inflation, is due
to this average price rise. A dollar will be worth less in the
future, due to inflation, simply because it won't buy as much
as it does today.
39
Appendix A offers various formulas that may be utilized
for simple present value computations. Also included in
Appendix A are the somewhat more complex present value formulae
utilized by the authors in computation of the present values
utilized in this thesis.
Recall Table IV and the seemingly obvious choices which
could be made regarding total cumulative retirement pay. It
appeared that the longer an officer remained on active duty
the more total benefits he could expect to receive up to and
including 28 years of service. This could possibly lead some
officers to conclude that it would be better to remain on
active duty for periods up to 28 years in order to receive
these greater total amounts.
This is not necessarily so, for as we just pointed out,
Table IV does not consider the time value of money.
G. PRESENT VALUE OF TOTAL RETIRED PAY
Tables V and VI depict the present value of the total re-
tired pay an officer could expect to receive given the grade
and number of years indicated. The present value formula used
to arrive at the figures in Tables V and VI is given in Appendix
A.
These two tables are computed at discount rates of 5% and
8%, respectively. These two rates are used because they re-
flect the lower and upper bounds one could reasonably expect
to receive on savings accounts and certificates of deposit at
the present time. This is not to say these two rates are more
correct than other rates that may be applied, or that these two
40
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rates are the only rates which may be applied. On the con-
trary, the discount rate which should be applied is the personal
discount rate which pertains to the individual for whom the
analysis is being performed. The authors could not perform
computations for all rates of interest/discount, and therefore
for all persons, thus only the two presented were used. They
will also be used for all present value computations throughout
this chapter.
Upon inspection of Tables V and VI, it is immediately obvi-
ous that consideration of the time value of money can signifi-
cantly alter the cumulative value of a lifetime of retired pay.
Not only are the total values changed to a much lower amount,
they also decrease with an increase in time.
Tables V and VI are designed such that they portray the
present value of a future series of payments at twenty years
of military service. For example, after completion of 20 years
of active service, an 0-6 who contemplated retirement at that
point can see that (at a discount rate of 5%), his future
retirement pay checks of $1,057 per month for the next 29.5
years (354 months), are worth $196,000 now. If the same 0-6
were to remain on active duty until completion of 30 years, he
could see that the pay to be received from age 53 to death at
age 74.2, a total of 21.2 years, is worth $114,000 at the 20
year point. The present value of the retirement pay of an 0-6
at the completion of 20 years of active service is worth more
than after the completion of 30 years service essentially be-
cause there are ten years between the two retirement points -
the time value of money.
43
When we considered Table IV, it seemed reasonable for an
0-6 who remained on active duty for 25 years to remain for one
more, or a total of 26 years. In this manner his cumulative
lifetime income would increase by over $30,000. Observing
Table IV it appears that this is no longer the case as the
move from 25 to 26 years results in no change. Perhaps a more
significant point is the $9,000 drop which occurs between 24
and 25 years and the $11,000 drop between 26 and 27 years.
Note also the increase for the 0-6 when moving from 21 to 22
years - again the longevity pay increases are obvious.
The present value considerations of Tables V and VI are
interesting to look at and compare but they are still just
another way of looking at the financial situation of retirement
These presentations are useful but by no means complete. A
military officer could not hope to make a rational decision
regarding the best time to retire merely by studying these
tables - yet some officers may make that very decision on less
information. In order to make an intelligent decision, still
other factors must be considered.
H. ADDITIONAL SOURCES OF INCOME
In addition to the income an officer could expect as a re-
sult of his monthly retirement check, there are other potential
sources of income. These additional sources of income must
also be investigated. What are they and what magnitude of in-
come contribution can a retired officer expect from them? The
following discussion serves to point out some of these poten-
tial sources.
44
I. CIVILIAN EMPLOYMENT
After the income resulting from the actual retirement pay
check, the first other source one considers will probably be
that of civilian employment. Several questions could be
raised at this point. What kind of employment does the retiree
want? What is he qualified to do? What chances does he have
of getting the job he wants? What will various jobs pay? The
first three questions are all addressed in a later chapter.
We will concern ourselves here only with the last question,
that which concerns how much income a retired officer can ex-
pect to receive as a result of a civilian job.
It would be ideal if we were able to state emphatically
that given certain conditions of education, age, etc., one
could expect 'x' pay from 'y' job in retirement year 'z'. This,
of course, is not the case and any attempt at such a prediction
would be less than creditable. This is not to say that it is
impossible to arrive at some approximations that are reason-
ably acceptable given the degree of uncertainty with which we
all must live and an awareness of the limitations inherent in
such predictions. That is, we can make certain predictions as
to what a retired military officer could expect to earn in a
given situation, and, even though these predictions will not
be entirely valid, they will provide useful information in the
form of at least relative figures that can be used for compari-
son and demonstration.
In a search of the normal sources of information the au-
thors could find no useful statistics regarding the salaries
retired military officers could expect in a second career.
45
Figures are available giving the average salaries for all re-
tired officers working at second careers but such figures
grouped all officers into one category and failed to provide
the detailed information required for this thesis.
As previously pointed out, the authors were constrained by
time and were thus not able to conduct a survey of retired
naval officers in order to gain the required information. It
was therefore necessary to rely on information provided by a
supposedly valid but dated source.
A group from Stanford University headed by Allen J. Lenz ,
than a Lieutenant Commander in the Navy Supply Corps, conducted
a survey of considerable magnitude in 1966. The survey covered
a sample population of about 6,500 officers. The survey was
conducted such that the results were considered representative.
[Lenz, 1968]
Lenz found indications that the probability of receiving a
job decreases as retirement age increases. He also found that
the second career income of personnel retiring in their mid-
forties was significantly higher than those officers retiring
after age fifty, [lenz, 1967] In general, Lenz established
a relationship between military retirement age and second
career incomes. He also demonstrated that income resulting
from civilian second careers tends to decrease as retirement
age increases. [Lenz, 1968]
The figures collected and utilized by Lenz in his disserta-
tion were determined to be suitable for use as a basis for
second career income figures required for this thesis. The
figures extracted from the Lenz dissertation are given in Table
46
VII. They represent average civilian second career incomes for
officers of grades 0-5 and 0-6 who earned a Master's Degree
prior to retirement. Notice the decrease in reported income
with the increase in age at retirement.
In order for the Lenz figures to be useful to the authors,
some adjustment was necessary to account for the time span be-
tween 1967 and the present. A study was made of various em-
ployment categories thought to represent a reasonable cross
section of jobs retired military officers could expect. These
jobs included those in the fields of accounting, buyers, mana-
gers, job analysts, personnel directors, engineers, and cleri-
cal workers.
The statistical abstract of the U.S. for 1970 and 1975 pro-
vided percentage increases in average salaries per year for
the jobs previously mentioned. The average current dollar in-
crease in salaries for those jobs from 1966 to 1974 was found
to be 45.5%. [U.S. Statistical Abstract, 1970, p. 234; 1975, p.
365] This percentage increase was then applied to those
figures extracted from the Lenz dissertation thereby inflating
the 1966 figures to more current (1974) expectations. These
figures are given in Table VIII.
Although the methods used to arrive at the contents of
Table VIII preclude any real degree of accuracy, they are
still very useful in that they do provide an idea of what a
retiring officer might expect to receive as a second career
income. They are considered more useful than figures depicting
average wages for civilian jobs because retired military
officers who obtain second career employment traditionally do
47
TABLE VII
AVERAGE ANNUAL INCOME BY RETIREMENT
AGE AND GRADE
(1966 SURVEY)
GRADE
RETIREMENT
AGE LESS
THAN 44
44-45
46-47
48-49
50-51
52-53
0-6
0-5
$20,270
15,720
$17,640
14,350
$15,670
13,630
$14,260
11,880
$12,230
12,080
$12,490
11,250
SOURCE: Allen J. Lenz , Military Retirement and Income Maximiza -
tion: An Examination of the Economic
Incentives to Extended Military Service ,
1967, Table 4-3, p. 83.
48
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49
not obtain the same income level in those jobs as civilians
who have had the same types of jobs for many years.
The authors assumed the figures from Table VIII are repre-
sentative of what a retired military officer could reasonably
expect to receive as a second career income. We thus have
another potential source of income which may be considered by
those officers contemplating retirement.
If the potential retiree considers the phenomenon of de-
creasing second career income with increasing age, in conjunc-
tion with increasing retired pay resulting from additional
years of active duty service, he may realize he is faced with
a trade off. Is it better to retire early and possibly ob-
tain a higher paying second career job, or is it better to
retire later and accept a lower paying second career job while
collecting a larger retired pay check?
The answer to this question is, of course, determined by
the goals the individual officer is seeking to reach through
such a decision. If he is concerned with maximizing his total
future income stream, his answer would no doubt be different
than if he were attempting to accomplish some other goal. A
look at this question from a financial point of view of the
total future income stream is presented at a later point in
this chapter.
J. OTHER SOURCES OF INCOME
In addition to the income resulting from the employment
one might find in the civilian community, there are other
potential sources of income. Savings accounts, mutual funds.
50
stocks, bonds, and real estate are some of the more common
type of income-producing investments. If the potential re-
tiree has carefully planned his investments over his active
duty career, and if he is fortunate, it is entirely possible
to accumulate a sizeable estate by the date of retirement.
As an example consider an aviator who had just met his
first "gate" thereby drawing $245 per month flight pay. If
he were to invest that flight pay every month at 7% interest
(a yearly interest currently being paid by some Federal Credit
2
Unions), he could accumulate over $69,000 in fourteen years.
At 7% interest the principal would increase by $4,830 per year
($402.50 per month). This means if an aviator had a tax rate
of 25%, he could feasibly retire after 20 years and receive
an additional $302 per month from the interest on his savings
account without touching the principal.
Such tenacity applied to savings or other investment plans
is unusual but the point is made that careful planning and
possibly some sacrifice during one's active duty career can
pay out sizeable dividends during retirement. These divid-
ends could be especially useful considering the impact they
could have on second career income requirements necessary to
maintain a given standard of living.
The decision to save or spend one's flight pay is an
individual decision. Some aviators would rather have $245
2
For simplicity the assumption is made here that the $245
is invested and compounded to $69,000 before tax.
51
per month to spend every month rather than save for some date
in the uncertain future. As we have learned, the time value
of money is an important consideration.
An important point can be made regarding such investments
and the resulting income. The point is: even if the retired
service man should happen to die, these sources of income are
still available! This is not so with a second career and the
income associated with it. If the retiree dies, his family
will lose any income resulting from his employment unless
specific provisions to the contrary are in affect.
K. FINANCIAL PROTECTION
This particular line of thought brings us to another
financial consideration - that of life insurance and other
annuities. One may or may not believe in the usefulness or
overall concept of life insurance and this is certainly not
an attempt to sway anybody's opinion one way or another. Life
insurance does, however, have an important role in the finan-
cial planning of many military families and it therefore de-
serves consideration here as it pertains to the potential re-
tiree. Every military member is authorized life insurance
up to $20,000 under the Servicemen's Group Life Insurance
Program (SGLI). This coverage is provided at a cost to the
member of $3.55 per month and is automatic unless a lesser
amount of coverage is designated by the member in writing.
L. SURVIVORS' BENEFITS
Another type of coverage afforded the beneficiaries of
the military man is through the survivors' benefits provided
52
by Social Security. This is not really an insurance plan and
it is provided at no additional cost to the serviceman. It
has a place in this discussion because it provides a potential
income to the military man's family if he dies while on active
duty.
Income to beneficiaries under this plan can amount to a
current maximum of $915 per month for a widow with two or
more children. These benefits are terminated when the young-
est child reaches age 18 if the widow is under age 60. When
the widow reaches age 60, she becomes eligible for monthly
payments for life.
M. DEPENDENCY AND INDEMNITY COMPENSATION
In addition to benefits provided by Social Security, the
serviceman's widow and children may also have benefits avail-
able to them through the Veterans' Administration. In December
of 1969 Dependency and Indemnity Compensation (DIC) went into
effect. DIC is based on pay grade and is paid to the eligi-
ble unremarried widow when death occurs while on active duty
as a result of disease or injury which was incurred while on
active duty.
DIC varies from $304 per month for an 0-1 to $615 per
month for an O-IO. For each child under the age of eighteen
the monthly DIC may be increased by $29 per child. Addition-
ally, DIC may be increased by $62 per month for each child
of age 18-23 attending a school or college approved by the
V.A.
The significance of these three potential sources of in-
come is that they are no longer available when the serviceman
53
retires. It then becomes an issue that perhaps the retiree
should plan for the loss of these protection plans prior to
retirement in order to provide some means of protection after
retirement. He may wish to enroll in the Survivors' Benefit
Plan or purchase life insurance, or both.
Assuming that an officer believes in life insurance, has
a desire to provide this type of financial protection for his
family, and would purchase protection of this type after re-
tirement, we may develop a point worthy of further study.
The officer, who voluntarily retires at any time prior to the
maximum time he is eligible to remain on active duty, must pay
out of his pocket for that protection he could otherwise have
had at no additional cost had he remained on active duty for
the maximum permissible number of years. As an example, con-
sider a Commander who retires after completion of 20 years
when he could have remained on active duty until at least 26
years. Such a Commander has six years during which he must
pay for protection. This could be especially significant in
the case of benefits provided through Social Security and DIC
because the cost of an insurance program capable of paying out
comparable sums of money would be substantial.
Here again we have a decision completely dependent on the
individual's point of view. Those who favor the idea of life
insurance and the protection it can afford may be well advised
to consider its total aspects and to give sufficient thought
to the position it occupies among the financial factors.
Those who do not favor life insurance or have no intention of
making any such related plans prior to and for retirement need
54
not consider it as a financial factor in the retirement deci-
sion. One should be aware, however, of the potential results
of either decision to buy or not buy life insurance. There
is a risk that the retiree may die prematurely with an associ-
ated impact on his family. Whether or not the retiree chooses
to acknowledge that risk in no way changes it; the risk is
the same in either case.
Those who wish to further research the area of life insur-
ance and related annuity plans are invited to examine a thesis
by Morris C. Johnson, Family Financial Protection for a Re -
tiring Member of a Uniformed Service . [Johnson, 1971] In
this thesis Johnson gives complete consideration to all types
of insurance and annuities and how they relate to the retiring
military man.
N. EXPENSES
The personal financial situation relates not only to sources
of income but to expenses as well. In addition to the normal
expenses one expects as a result of everyday living, there are
certain other expenses that are particularly applicable to the
potential military retiree and they will be the subject of the
following discussion.
0. EDUCATIONAL COSTS
One such expense is that of educational costs, not only
for the retiring officer's children, but possibly for the
retiring officer himself.
The retiring officer could possibly pursue an advanced de-
gree after retirement to make himself more attractive to poten-
tial employers, to get a higher paying job, or both.
55
Assiiming one desires the advanced degree, it appears that
it may be better to get it prior to retirement. This is be-
cause one may get the opportunity to gain experience in the
particular field of the advanced degree while still on active
duty and thus improve retirement job opportunities or secure
a better wage. Also, if an officer must pursue an advanced
degree after retirement, he may be forced to do so without
the benefit of a civilian job. That is, he may be receiving
his advanced education during a period of decreased income
(retirement without supplementary income) when he could possi-
bly have earned the degree while on active duty, thus allowing
himself to participate in the job market immediately after
retirement.
The tuition cost of graduate education will vary with the
graduate school attended. Private institutions are naturally
more expensive than public institutions. Fees required to at-
tend the University of California, Santa Barbara, for example,
would be approximately $250 per quarter for a resident of
California and $750 for a non-resident. This cost would, of
course, be partially offset by an Veterans' Administration bene-
fits. In the case of a veteran with three dependents, the
benefits would amount to over $360 per month.
Educational costs associated with the procurement of
college degrees for one's children can be of near-heroic pro-
portions. Admittedly, those costs will still be present
whether on active duty or retired. The difference is these
costs usually begin to occur around the twenty year point
when one is first eligible to retire. The retired officer may
56
not have an income sufficient to cover these costs whereas the
officer still on active duty might well be able to do so. The
difference, although of little consideration to the retiree
who is assured an income after retirement equal to or greater
than that available while on active duty, is certainly impor-
tant to the retired officer who has no such assurance. The
retiring officer who is without this assurance may be forced
to remain on active duty in order to afford these costs. If
an officer has already retired, he may have to deny his child-
ren an education at an expensive school they really wanted to
attend. The possibility also exists that he may have to deny
them educational support altogether.
Perhaps an even more interesting point is that an officer
may anticipate such great educational costs that it is neces-
sary to retire in order to find a very high paying civilian
job to meet these costs. Thinking along these lines will de-
pend on the anticipated costs to educate one's children and
the prospects of securing such a job.
Table IX provides projections of educational costs for the
years 1976-1981. It can be seen that the projected costs for
four year public universities for the years 1976 and 1977 are
approximately $1,900 per year. For the same time frame the
cost of non-public four year universities is approximately
$4,200 per year. If an officer had two children spaced four
years apart and he wanted to provide each of them with four
years of college at a public four year university, the total
cost could well exceed $16,000, an average expense of over
$2,000 per year. If an officer had two children in college at
57
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58
the same time, the cost of over $4,000 per year could prove to
be rather formidable.
Given costs such as these it is easy to see why the mili-
tary officer must carefully consider how education plans
fit into the personal financial situation and how these plans
will influence his retirement decision.
P. LOCATIONAL EXPENSES
Another category of expense that can be associated with
retirement is that of locational expense. Upon retirement the
retiree must make the choice of where he wishes to make his
home. If the area he chooses is not located near a military
installation, he may incur expenses resulting from a loss of
opportunity to utilize commissary and exchange facilities. It
is possible for the loss of these privileges to cause food ex-
penses to increase by as much as 20% and consumer goods ex-
pense to increase by as much as 10% to 30%. [Martin Binkin, p.
11] This could be a significant amount to a retiree even if he
were able to find civilian employment which produced an income
sufficient to raise his total income to a level equal to his
previous active duty income.
If a retiree had a choice of two civilian jobs, one within
shopping distance of a military installation and one not,
acceptance of the latter job would require a higher wage than
the former in order to account for the increased cost of food
and consumer goods expenses. Regardless of where one decides
to retire, it is necessary to remember that any location which
does not afford access to a military installation is probably
59
going to result in increased expenses during a time when they
may not be especially tolerable.
Q. HOUSING EXPENSES
There are some expenses related to retirement that may or
may not exist while on active duty. One such expense is that
of a home itself. It is possible that a military officer and
his family lived in government housing during the majority of
the time (if not the entire time) the officer was on active
duty. It is further possible that this family never owned a
house and consequently never had to make house payments. If
this is the case, the transition from housing provided in lieu
of BAQ payments to that of house payments and the possibility
of a sizeable down payment could be quite traumatic.
R. TOTAL FUTURE INCOME STREAM
Thus far we have discussed potential incomes and expenses
that could be expected in the retirement situation. Let us
now consider just two methods by which the potential retiree
could view the income associated with retirement from a more
complex vantage point. The authors decided to investigate
what the potential retiree could expect in the way of total
future income resulting from a combination of active duty pay,
military retired pay, second career pay, and second career
retired pay. In this manner we could evaluate the total fu-
ture income stream a naval officer could reasonably expect
from the point of first eligibility for retirement (twenty
years) until death. The potential retiree could then look into
the future from the twenty year point and see more clearly the
60
apparent financial results of a decision to remain on active
duty or to retire at yearly intervals from 20 through 30 years
of service.
In order to determine this total future income stream a
present value model was constructed such that the present value
of the Total Future Income Stream (PVTFIS) equals the Present
Value of Active duty Pay (PVAD) , plus the Present Value of the
Military Retired Pay (PVMRP) , plus the Present Value of the
Second Career Pay (PVSCP) , plus the Present Value of the Second
Career Retired Pay (PVSCRP) . In equation form the model is
presented as such:
PVTFIS = PV^^ + PV^ ^ PVg^p + PVg^jjp.
A more complete mathematical presentation and explanation of
the model and its components is given in Appendix A.
The basic amounts that were used for the four forms of pay
were developed from sources already mentioned. Active duty
pay and military retired pay were taken from respective 1
October 1975 pay scales and the second career pay was taken
from Table VIII. The retired pay resulting from second career
income was determined from the second career income in a manner
suggested by Lenz, where
Annual Civilian Employment Retirement Benefit =
current annual income X(.Ol) X numbers of years
in civilian employment. [Lenz, p. 72]
This is a typical type of for-mula often used to estimate retire-
ment benefits, and, even though it precludes a high degree of
accuracy, it will serve to furnish an approximation of the
61
retirement benefits required for this thesis. The results of
the computation of second career retired pay is presented in
Table X.
The PVTFIS was computed only for the grades of 0-5 and 0-6
as these two ranks provide a sufficient basis for comparison.
Tables XI and XII present the PVTPIS at discount rates of 5%
and 8%.
These two tables provide a means of viewing what a poten-
tial retiree could expect his PVTFIS to be given the assump-
tions of the constituent pay amounts. With these assumptions
in mind, an observation of the two tables shows that for both
grades and both discount rates retirement immediately follow-
ing the completion of twenty years of active duty service pro-
vides the highest PVTFIS and that it decreases every year with
the exception of years 22 and 26 for the 0-6 at 8%. The pros-
pect of early retirement with a correspondent greater second
career income appears to provide a greater PVTFIS than does
retirement in later years. The greater second career income
received, if early retirement is elected, appears to have a
greater influence on the PVTFIS than does the larger retired
pay check associated with later retirement.
Other observations can be made. For example, an 0-6 using
the 5% discount rate might express indifference between 25 and
26 years. Here again the large active duty pay increases for
the 0-6 at year 22 and year 26 have a pronounced effect on the
total PVTFIS. The 0-5 would experience the same type of in-
difference between years 21 and 22. If an 0-5 wanted to remain
on active duty until at least 21 years of active service were
62
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65
complete in order to see if he would be promoted to 0-6, he
could just as well wait until 22 years were completed. This
is because the slight decrease ($2,000) associated with re-
maining for the extra year might possibly be warranted con-
sidering the possibility of promotion to 0-6 and therefore
an opportunity to retire later with a higher PVTFIS. For an
example of how this can be treated, see Appendix B.
The 8% table is rather interesting in that it demonstrates
higher discount rate results in overall lower total figures
for both grades but an increase in PVTFIS for the 0-6 at year
22 and 26. An 0-6 utilizing an 8% discount rate might there-
fore require substantial motivation to keep him from remaining
until the completion of 26 years because in this case one
additional year brings him an additional $11,000.
Tables XI and XII can be useful as a means of approaching
the trade off decision previously mentioned or as a means of
moving toward achieving a maximum PVTFIS. There exists, how-
ever, yet another means the authors decided to employ in ex-
ploring the personal financial situation.
S, THE HALF PAY FALLACY
One occasionally hears fellow officers state that if an
officer remains on active duty past twenty years he is in ef-
fect working for half pay because he could retire and draw
half pay. This is, of course, absurd; because , first of all,
when an officer retires, he does so at one-half base, not
total pay. Secondly, this type of logic does not account
for the opportunity cost of the lost benefits in the form of
66
greater retired pay which could result from increased service
should the officer elect to retire at some future time in ex-
cess of 20 years.
It is also true that by remaining on active duty a naval
officer loses an opportunity to earn a civilian pay potential-
ly of high value. The method employed by the authors seeks
to resolve these two separate and distinct opportunity losses
and to provide a means of determining what second career in-
come would be required to produce indifference regarding the
decision to retire at an early vs. later time.
Specifically, we sought to determine how much an officer
who retires prior to a potential later retirement date must
make in civilian employment in order to make up for the lost
retirement benefits he would be able to claim had he remained
on active duty. The period of time to be allowed for this
recoupment would be that period of time between the two retire-
ment points in question. Tables XIII and XIV present the re-
sults of our analysis which was performed in the following
manner.
Grade and years of service combinations were chosen which
represented points a potential retiree would likely consider
for comparison. Next, the difference in retired pays result-
ing from the two different retirement points was determined.
This amount is given as column (g) . This difference was then
considered as an annuity over the number of years it would be
received (from the late retirement point until death) and the
present value of this annuity at the late retirement point
was determined (i). This present value is the amount required
67
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to pay out an annuity equal to column (g) for the number of
months from the late retirement point until death (h) . If
the early retiree had saved the amount in (i) over the period
of time between the two retirement points, he could then col-
lect a monthly amount equal to that amount he had foregone by
virtue of his early retirement.
To determine the monthly amount needed to be invested at
5% and 8% over the difference in retirement points in order
to accumulate an amount equal to (i) , a future value of an
annuity formula was used. This amount is given as column (j)
and as column (k) before tax.
Column (k) was then added to (f) , the amount required to
bring the retiree up to the income level he would have main-
tained had he not retired, and the total monthly income re-
quired to recoup the retired pay lost as a result of early
retirement was the sum (1) .
A good working example is Table XIV for a Commander at 20
vs. a Commander at 26. If a Commander were to retire at 20
years of service rather than his maximum allowable active
duty time of 26 years (assuming he fails promotion to 0-6),
he would have to save $460 per month for 6 years (72 months).
This amount would have to be continuously compounded at an
interest rate of 8% in order to accumulate a sufficient amount
which could be paid out for 292.8 months (24.4) years at the
rate of $330 per month. ($330 per month is the additional
retired pay an 0-5 who retires at 26 years receives.)
To save this the $460 per month, while maintaining an
income equal to that which he could have made had he remained
70
on active duty, requires that he have an income source (second
career employment) in addition to his monthly retirement check
which provides a minimum of $2,04 8 per month ($24,576 per
year) .
If the 0-5 in question could find such a second career
job, and if he could save the amount required, he could make
up for the retired pay lost because of his early retirement
in 6 years. If he could find an income source of $24,576 per
year in addition to his retired pay, he could be said to be
financially indifferent to retiring or remaining on active
duty when comparing retirement at 20 with 26 years.
This analysis produces some rather startling results when
the required salaries are considered. Of course, some of the
salaries are huge because of the very short time allowed to
save the amounts required. On the other hand, some of the
salaries are very formidable and the time allowed to save the
amounts required to pay out the annuities are quite reason-
able. It appears then, even with the time considerations,
that the recoupment of lost pay due to early retirement re-
quires a substantial source of second career income.
Early retirement appears to be a financially desirable
situation when one recalls the PVTFIS analysis. The PVTFIS
analysis demonstrates that a greater PVTFIS can be expected
with early retirement if_ the early retiree can achieve a large
second career income. The opportunity cost/indifference
analysis supports the PVTFIS analysis in that it points out
the large second career income required to retire early and
71
still maintain a future income as great as one who retires
later.
These two analyses represent two different means of look-
ing at the same thing. They both demonstrate that substantial
second career incomes are required to make early retirement
financially desirable. If the potential retiree cannot meet
the second career income required to retire early and achieve
indifference between early and late retirement, he should
seriously consider retiring at a later date if the financial
considerations are dominant.
One must remember that both of these last two methods of
analysis are devices which can be utilized by the potential
retiree as an aid to rational decision making. Neither analy-
sis is correct or incorrect; they are but different methods of
observing the same situation in hopes of greater understanding
and intelligent decisions.
72
V. RETIREMENT ADJUSTxMENT
Many officers are apprehensive at the prospect of retire-
ment. Possibly they view it as the end of a life style they
have known since maturity instead of viewing it as an oppor-
tunity to begin a new career in civilian life - which it
really is for most officers. Unpleasant examples of adjust-
ment problems and failures in retirement tend to increase
consternation and uncertainty as the officer approaches the
end of his military career. The thought of a sudden shift to
uncertainty after years of status and prestige can be a tre-
mendous shock to the officer prior to and immediately after
retirement. D. D. Braginsky and B. M. Braginsky in studying
the unemployed worker of all ages observed that, "The higher
one's status and the more sudden one's fall, the greater the
impact." [Braginsky and Braginsky, 1975, p. 70]
Early preparation and planning for retirement and the sub-
sequent civilian career can remove much of the uncertainty
and thus reduce the adjustment to civilian life. The retiree
needs to recognize that his new status will present some
significant psychological problems. In 1963, J. D. Goodchilds
and E. E. Smith found that higher status men (equatable to
career military officers) suffer more as the duration of in-
activity and unemployment increase, growing more defensive,
conformist and self-critical, and less outgoing, while lower
status men (blue collar workers) adapt easier. [Braginsky and
Braginsky, 1975] Other studies show the extra agony and the
73
rising bitterness that often ensue as the older worker at-
tempts to find employment. The old adage that the first step
in solving a problem is recognizing that it exists applies to
the mid-career job change military retirement presents. To
make a smooth transition into retirement and the civilian
economy, the military officer must take periodic inventory
of himself and identify those areas wherein problems exist or
may develop. [Kelly, 1961] Advance planning will remove or
reduce the shock and surprises inherent in military retirement.
Retirement after twenty to thirty years of military serv-
ice into the relatively unknown civilian world is for many,
in effect, a "change of life." Often a situation termed
"role confusion" arises which may be manifested by irritabili-
ty, depression, lack of energy, apathy, increased alcohol in-
take, and other heretofore unknown symptoms in the retiree.
[Ewing, 1975] The naval officer has been accustomed to clear-
ly defined roles governed by rank and billet. He has filled
these roles essentially twenty-four hours a day for the past
twenty plus years. As an example, take the Navy Commander
who is a major department or branch head of a large operation-
al staff and is deeply involved in the formulation of long
range and day-to-day policy. His rank, position, and experi-
ence make his advice and counseling highly sought after. His
decisions and instructions to subordinates are quickly and
efficiently implemented. He has frequent contact with the
highest levels of command. Suddenly, his retirement day ar-
rives, and not only is he no longer involved in policy making,
but he is unaware of the eventual policy - he is on the outside
74
looking in! Essentially, he now must assimilate into an en-
tirely new society.
Upon retirement much of the certainty of his identity dis-
appears, especially as he observes the minimal carry-over of
his role and status to the civilian economy. He is confronted
with a new vocabulary and new values. Translation of his
military background into meaningful relevant terms for a
prospective civilian employer can be mystifying. What type
of occupation is he qualified for? How does he apply for a
job? How does he write an effective resume? How should he
negotiate for the salary he desires? How flexible should he
be in seeking job location and responsibility? These deci-
sions coupled with continuing financial and family pressures
to maintain a particular standard of living often precipitate
a phenomenon generally called "the Retirement Syndrome" by
many military psychiatrists. [Youngpeters , 19 74] The Retire-
ment Syndrome, according to Dr. (COL) John S. McNeil, though
characterized by general anxiety, depression, and irritabili-
ty can be separated into three chronological phases. The
first usually begins a few years before retirement and gener-
ally increases as retirement approaches. Pains with no physi-
cal basis may develop. When the day of retirement arrives,
varying degrees of role confusion arise and may last for a
year or more depending on the retiree and his success in find-
ing satisfactory and personally rewarding employment. Finally
comes the adjustment phase. The transition from a position of
authority and status to that of just another employee at a
time when his wife may be entering the menopausal period and
75
thus possibly uncertain of her future role. In addition,
their children are often in the difficult teenage years.
[Youngpeter, 1974] These factors can place a severe strain
on the officer's family situation. This transition is especi-
ally difficult for the career military man in that he is mak-
ing this career change in his raid-forties to early fifties
when his civilian counterparts are approaching the zenith,
not the end of their careers. A military career is quite
different from that of a civilian when one compares the re-
spective working environments. The non- regular working hours,
frequent moves, regulated lifestyle and demands of a military
career are foreign to most civilian middle management employ-
ees - especially in the ability or freedom to change jobs.
Dr. McNeil indicates that the degree and rapidity of retire-
ment adjustment depends on four factors: "Is he satisfied with
his job? Is he satisfied with his retirement residence? Is
he maintaining his accustomed standard of living? and. Is
his family happy with his retirement?" [Ewing, 1975]
The consensus of how to ease the adjustment to retirement
is to approach retirement not as the end of a way of life but
as a new opportunity with careful, realistic preparation.
Most military men and their families do make the transition
to retirement without serious psychological problems, but the
transition remains a cultural shock of varying degrees.
76
VI. GENERAL ECONOMIC CONDITIONS
Our economy is always in one phase or swing cf a' business
cycle. Predicting future economic conditions or business
cycle phases, however, is often next to impossible for the
economist, let alone the average naval officer. The prospec-
tive retiree about to enter the civilian job market should be
aware of a few basic economic indicators and hov/ they could
affect his post-retirement employment opportunities and thus
his standard of living. On active duty, he is somewhat insu-
lated from fluctuations of the economy as compared to his
civilian counterpart in a middle management position. The
officer's employment and salary are very secure and he can
generally expect his pay to increase along with changes in the
cost of living. The potential change in this stability war-
rants some thought by the officer prior to reaching the deci-
sion to retire. Rather than affect the decision of whether
to retire or not, a review of some economic indicators would
probably cause the officer to adjust the timing of his mili-
tary retirement. He naturally would want to enter the civi-
lian labor market at a time when economic conditions and the
marketability of his individual skills will allow the highest
possible chance of obtaining the civilian job necessary to
meet his personal goals. In particular, the officer should
carefully review the economic conditions in the area or areas
where he plans to live or look for employment. Employment
and price levels can vary greatly from one region of the
77
country to another. Some useful indicators of the potential
employment climate are as follows.
A. GROSS NATIONAL PRODUCT (GNP)
A comprehensive measure of the nation's total output of
goods and services in terms of their current dollar value.
The GNP can be determined by summing all expenditures of cur-
rently produced goods and services or all incomes earned in
producing these goods and services. [ Dictionary of Economic
Terms , 1973] The GNP is often viewed as a measure of the
overall performance and health of the economy. The potential
retiree should review the changes and growth rate of the GNP
from year to year when corrected for price changes (inflation)
The GNP reflects how much Americans produce for the market
place, but not whether they are healthier or happier.
The GNP statistics are too macro in nature to provide the
officer with a basis on which to make his retirement decision,
but they can provide a measure of the economy's growth which
can be compared to that needed to alleviate a particular
economic problem. For example, by the current administra-
tion's own calculations, the economy must grow at a real rate
of six percent per year for the next five years in order to
produce enough jobs (more than two million per year) to ab-
sorb the new entrants into the labor force and reemploy those
still jobless as a result of the recent (1973-75) economic
recession. The situation is compounded by the necessity of
the economy to generate more new jobs to maintain the current
level of employment due to increasing productivity.
78
Productivity increases via more efficient use of labor, raw
materials, and capital would raise unemployment and/or reduce
the average work week if new labor demand were not generated.
Since 1900, annual productivity increases have averaged 2%
and 2.6% since 1940. [Bratt, 196; Business Conditions Digest ,
February 1976] The significant point in this discussion is
that our economy has never sustained the growth or created
the number of new jobs for such a long period in peacetime
to reduce unemployment to the pre-recession level of 5%.
[ Business Week , March 22, 1976]
B. CONSUMER PRICE INDEX (CPI)
A monthly measure, compiled by the U.S. Bureau of Labor
Statistics, of changes in the prices of goods and services
consumed by urban families and individuals. The index in-
cludes a group of about 300 goods and services, ranging from
food to automobiles and from rent to haircuts, normally pur-
chased by urban wage earners and clerical consumers. [ Diction -
ary of Economic Terms , 1973] Current prices, the CPI, are
expressed in terms of a percentage of average prices during
1976 (the current base year) . The CPI is often used as a
basis in wage/salary negotiations and cost-of-living salary
increases .
C. UNEMPLOYfffiNT
Increased unemployment generally results from a depression
or recession period of the business cycle. Its immediate cause
is usually a reduced demand for labor in a downv/ard swing of
the economy. [ Dictionary of Economic Terms , 197 3] Unemployment
79
is hard to predict due to its irregular occurrence and varia-
tion in intensity and duration. In short duration recessions,
the lower-paid blue collar workers are the most affected by-
changes in unemployment; however, in the recent 1973-1975 re-
cession considerable numbers of high-salaried professional
white collar workers found themselves unemployed. This in
turn severely reduces the employment opportunities for new
workers entering the market such as military officer retirees.
To trim two percentage points off the current unemployment
rate by 1980 would require the creation of 12 million new
jobs. [ Business Week , March 22, 1976] What makes the current
unemployment more stubborn than ever is its structure, with
the heaviest concentration of unemployment am.ong teenagers,
minorities, and older workers. [ Business Week , March 22, 1976]
Monthly published data from the Bureau of Labor Statistics
indicate the unemployment situation in specific occupations
and sectors of the work force, along with the overall unemploy-
ment picture. [Council of Economic Advisors, 1973]
D. CORPORATE PROFITS
The amount left over after a business enterprise has paid
all of its expenses. Profits vary from time to time, from
company to company, and from industry to industry. [ Dictionary
of Economic Terms , 1973] Corporate profits are a good indi-
cator of short-term economic health in that profits usually
lead the economy. As profits rise, employment, income, and
capital expenditures rise and the reverse is also true. Pro-
fits also should be viewed on a relative basis as compared to
80
previous years and corrected to constant dollar values (if
necessary) . The rate of change and direction of change are
the important relevant indicators in viewing corporate pro-
fits, since as profits and orders increase, corporations hire
more workers and increase productivity, or both.
E. ADDITIONAL INDICATORS
The following indicators, most of which are termed lead-
ing indicators since their upward and downward swings gener-
ally precede the peaks and troughs of the aggregate business
activity, should also be reviewed: [Brennan, 1975; Business
Conditions Digest , February 1976]
1. The average workweek of production workers (hours)
2. New orders for durable goods
3. Construction contracts
4. Manufacturers' new orders (capital goods industries)
5. New private housing units started
6. Changes in business inventories (value and number)
7. Industrial materials prices
8. Corporate net cash flows
9. Changes in the money supply
10. New business incorporations
The current statistics and estimates of the above indica-
tors can be reviewed in publications such as the CPI Detailed
Report published by the Bureau of Labor Statistics, monthly
Economic Indicators prepared for the Joint Economic Committee
by the Council of Economic Advisors, and the Wall Street
Journal - all of which are available in most libraries.
81
Essentially what we are recommending is that the future re-
tiree develop an understanding and awareness of the overall
economic environment in the civilian sector, and particularly
in those industries in which he has the best opportunities.
Inflation and increases in the cost-of-living can have
some major effects other than employment opportunities on the
retiree vs. the active duty officer. The availability of
government living quarters and government paid utilities,
which require only that the officer forfeit his quarters
allowance, are prime examples of possible differences due to
economic conditions. Recently inflation has had a profound
effect on the cost of utilities and housing that the active
duty officer living in quarters may not realize or appreciate
when compared to what he would have to pay for similar serv-
ices as a retiree. Currently military retirees are protected
from the erosion of a fixed retirement income in contrast to
most retirees in the civilian sector by an adjustment formula
geared to increases in the CPI. Public Law 39-132, approved
August 21, 1965, modified the retired pay adjustment formula
to provide that, whenever the CPI rises by 3% over the CPI
base month for three consecutive months, retired pay is ad-
justed to the highest percent of increase in that three month
period. [Mackin, p. 154] Additionally, on 1 November 1969,
Congress further modified the CPI adjustment by adding an
additional one percent to each raise in federal/military re-
tirement annuities. When enacted, this one percent adjustment
(called "the one percent kicker") was to compensate for the
time lag between CPI increases and the raises in retired pay
82
and it supposedly would permit retirees to share in the na-
tion's rising standard of living. [ Navy Times , 5 April 1976]
This adjustment formula, and especially the one percent kick-
er, has come under heavy (governmental) criticism as being
too expensive and tends to overcompensate for CPI changes.
The prospective retiree should thoroughly investigate the
effective retirement pay adjustment law prior to electing
retirement.
83
VII. r^ARKETABLE SKILLS AND CIVILIAN EMPLOYMENT OPPORTUNITIES
Initially, it should be pointed out that there is a
particular category of employment that should be considered
potentially unattractive to retired military officers - that
is, employment by the Federal Government. The Dual Compensa-
tion Act of 1964 established rules govern'ing employment of
retired members of the Armed Forces and limitations on re-
tired pay received by retired officers employed by the Federal
Government. Under this act, an officer retired from the
regular component will receive full pay for his federal civi-
lian employment; his retired pay, however, will be reduced to
an annual rate equal to the first $2,000 of such pay plus one
half of any exceeding $2,000. The first $2,000 of annual pay
figure is adjusted upward with cost-of-living increases. As
of 1 January 1976, the figure had risen to nearly $2,900.
[Meyer, 19 76] This reduction does not apply to temporary
(30 days or less) employees.
A. ADVANCED DEGREES
Although the retired military officer has had years of
practical management (command) experience, the prospective
civilian employer often views him as having just returned
from a sabbatical of twenty to thirty years, where his mili-
tary experience is not particularly relevant to the job he
is applying for. Often unable to compete in specific civi-
lian management experience, the retiring officer must fall
84
back on the universally accepted qualifications of advanced
education. Lenz concluded in his analysis that:
1. Second career income levels and employment
rates increase with the educational level.
2. The second career income levels of advanced
degree holders decline very rapidly with
advancing retirement age until, at the later
retirement ages , their advantage over
bachelor's degree holders and non-degree
holders is relatively small.
3. Career officers apparently do respond to
economic incentives. The advanced degree
holders tend to retire at earlier ages then
do the bachelor's degree holders and non-
degree holders. [Lenz, 1968]
In assessing Lenz's conclusions, there appeared to be a
general lack of substantial financial incentive for officers
to remain on active duty if they possessed an advanced degree
in a field readily marketable in the civilian economy. In
fact, he found that for some advanced degree holders, even
a guarantee of one or two future promotions would not make
continued military service financially attractive. [Lenz, 1968
LCDR Joseph J. Andrilla and LCDR Bernard J. McGee, in "A
Study of the Monetary Value of the Master's Degree in Manage-
ment Issued by the Naval Postgraduate School," completed in
December 19 70, found that a graduate degree would significant-
ly enhance the employment ability of a retiree and would in-
crease starting salaries from $1,000 to $5,000 annually.
[Andrilla and McGee, 1970] Thus, in preparation for future
civilian employment, having an advanced degree is a definite
asset both in locating a job and in salary negotiations.
Additionally, an advanced degree would allow the officer to
serve in military billets in the particular field while on
85
active duty which would be a military career asset plus en-
hance the officer's expertise in the field before he begins
his civilian career.
B. MILITARY EXPERIENCE TRANSLATION
Many military assignments and duties seem on the surface
to bear little resemblance to occupations in the civilian
market. The officer approaching possible retirement should
allocate substantial off-duty time to analyze those fields in
the civilian sector in which he feels most qualified and most
interested. Seldom does someone else get anyone a job. An
ex-officer will be hired based on what he has to offer his
prospective employer and not on what military billets or rank
he held. He is the only one who can demonstrate what he has
to offer the civilian employer. A retiring officer has
amassed considerable management, personnel, and often techni-
cal experience in his military career, regardless of career
specialty whether or not he has had fonnal graduate education.
Despite the fact that active duty billets and experiences
differ greatly, they all involve management in varying degrees
Generally he has been exposed to many management techniques.
In a managerial capacity, presidents of corporations, heads
of government agencies, college administrators, and military
commanders all perform the same basic functions of planning,
organizing, commanding, coordinating, and controlling.
[Hodgetts, 1971]
The officer studying his civilian employment prospects
should develop an objective analysis of his military career
86
by component parts that relate to comparable civilian fields
and jobs. He should then translate the military terminology
into corresponding civilian terms in order to evaluate his
marketability after retirement. For example, the officer who
has commanded an aviation squadron or surface ship would
likely translate his command function into management of
resource technology and thus a close analogy understood by
the civilian employer. Imagination and forethought are the
keys in translating military experience and being able to
sell oneself in the private sector. Review of trade journals
and the study of common problems in the civilian sector may
generate interest in a particular field and lead to addition-
al investigation of the prerequisites for employment. This
in turn may cause the officer to plan a program of study in-
cluding off-duty education to further enhance his marketabili-
ty.
C. CIVILIAN EMPLOYER VIEW OF MILITARY RETIREES
Military retirees recently are finding themselves less
and less in demand for jobs. Ahead of them are recent col-
lege graduates followed by men who already have some business
experience. Admittedly, this is partially caused by high
cyclical unemployment and the recession our economy has gone
through in 1973-75. However, although ex-military officers
are productive workers, industry is reluctant to hire them.
This is the conclusion of retired Air Force Colonel Stanley
Hyman, currently a management consultant studying employment
problems of retired officers. LTCOL Hyman contends that the
ex-military officer is a high job turnover statistic in
87
civilian industry. He indicates that the average retiree
changes jobs once in the first year and twice in the first
three years - considerably higher than the new college gradu-
ate. This observation is confirmed by a 1972 survey con-
ducted by the Retired Officer's Association of its members.
[Gore, 1973] "Firms don't want to bother with these military
job turnover statistics," Hyman notes. "The job market is
becoming supersaturated . . . Organizations simply can't
afford to hire a man whose tenure is questionable." [Jones,
1970]
Andrilla and McGee also noted a reluctance of employers
to hire retired officers. They concluded that.
Much of the reluctance to hire retired military
officers is because of their lack of civilian
business experience, . . . employers feel that
military officers would not do well in an environ-
ment where they would have to step down from com-
mand level positions and attitudes. In spite of
this, it was significant that the vast majority
of these firms (325 surveyed) did have retired
officers employed. [Andrilla and McGee, 1970]
They also found that usually a retired officer would be hired
for a staff or administrative position. Military experience
in such fields as data processing, financial management, and
operations research could significantly increase the job
opportunities and compensation. [Andrilla and McGee, 1970]
It is generally assumed that job opportunities and incomes
in second careers decline as military retirement age advances.
A 1971 Air Force Times article indicate that, although the
number of military people seeking second careers after retire-
ment has been increasing in significant numbers as older
88
retirees remain unemployed, statistics compiled by the Depart-
ment of Defense in 1971 show that only 2.8 percent of age 40
to 42 officer retirees do seek work after retirement compared
to 16.8 percent of age 52 to 54 officer retirees. [McWalterS/
1971] A similar DOD study in 1973 found the full time employ-
ment rate among officer retirees (includes those seeking and
not seeking work) for ages 41-43 is 75% compared to 66% for
ages 50 to 52. [Army Times Pub. Co., 1974] Concerning age at
retirement, Lenz concluded:
As military retirement age advances, the percentage
of retirees who enter civilian employment decreases.
It may be that this decrease occurs because the
increased retirement pay from longer military
careers and/or reduced financial needs. Or, it may
be that they have chosen not to accept civilian
employment because they can find nothing 'suitable'
or commensurate with their military skills. [Lenz,
1968]
The individual's capabilities, skills, and education, in
large measure, determine his civilian employment opportuni-
ties. Thus, those with low civilian employment potential will
probably find delayed retirement more financially rewarding
(or less of a sacrifice) than will those with a higher em-
ployment potential.
89
VIII. LIMITATIONS AND CONCLUSIONS
This thesis has considered the factors relevant to the
military retirement decision of the individual naval officer.
Each officer who anticipates remaining on active duty for a
minimum of twenty years must realize that at some point re-
tirement will occur. The officer may make the retirement
decision himself by requesting voluntary retirement or he may
have the decision made for him through involuntary retirement
In any case the retirement point will be between twenty and
thirty years of active duty service unless the officer is pro-
moted to flag rank whereby service in excess of thirty years
is permitted.
The decision each officer must make is one of choosing
the retirement point which best serves his individual needs.
What each officer should do is determine by what his particu-
lar situation is and by what he wishes to accomplish, given
the available alternatives.
The officer may choose to retire after the completion of
twenty years of active service with the intention of develop-
ing a satisfying second career replete with financial bene-
fits. Conversely, the same officer may choose to remain on
active duty for some indefinite amount of time in hopes of
promotion. Either choice is influenced by a multitude of
factors and alternatives and either choice is equally diffi-
cult to make.
90
The authors offered various means of analyzing the finan-
cial aspects of the retirement decision through the use of
certain techniques as specified in Chapter IV. It must be
clearly understood, however, that the PVTFIS analysis pre-
sented in Chapter IV suffers from certain limitations. Those
limitations are as follows:
1. Discount rate . The discount rates utilized in the
analysis influenced the results of the present value
calculations. Different discount rates would have
produced different results.
2. Second career income . The manner in which the second
career income figures were determined does not lend
creditability to their authenticity. The figures
cannot be relied upon as being representative of
what a retired officer could actually expect to re-
ceive.
3. Other income sources . Other income sources were not
included in the PVTFIS analysis. An attempt to in-
corporate investment income and the like into the
model would be pure conjecture but the analysis is
nonetheless limited due to their absence.
4. Pay raises . Pay raises are not incorporated into the
analysis. It is almost a certainty that pay will in-
crease in future years and the PVTFIS figures would
have to be adjusted accordingly.
5. Future assumptions . The analysis assumes the future
will be like the present. There is no guarantee the
retirement system of the future will be even similar
to the system of today.
91
These limitations make it clear that the figurative re-
sults of the PVTFIS analysis cannot be considered factual.
The PVTFIS analysis was not intended to be factual nor was
it intended to be predictive. The military officer should
not expect to retire after a given number of years service
and thus be guaranteed the associated values in the PVTFIS
analysis .
The PVTFIS analysis was intended as a means whereby the
individual officer could view the financial aspect of retire-
ment from yet another vantage point. Through the PVTFIS
analysis the officer can observe how the various constituents
of the PVTFIS affect the total. The analysis will not pro-
vide numbers which an officer can 'bank' on, but it can pro-
vide a means toward more intelligent decisions regarding re-
tirement and future income.
The officer must project his own individuality into the
retirement decision. Accordingly, he must consider his own
goals, ideals, values, personality and ability when consider-
ing the implications of the analyses of this thesis. What is
important to him must modify his interpretation of any and
all situations.
Specific conclusions and recommendations that resulted
from the analysis are:
1. There are a general lack of positive financial in-
centives for officers to remain on active duty for
a maximum military career. This is contingent upon
their having a readily marketable skill in the
civilian market.
92
2. For the officer with substantial financial goals or
obligations (to maintain his current standard of
living) it is paramount that he have a commitment for
civilian employment before he establishes a firm
military retirement date.
3. The officer without a particular civilian transfer-
able skill or a graduate degree should be especially
thorough in reviewing his civilian employment oppor-
tunities and options. Remaining on active duty for
the maximum time possible may be his best option.
4. The choice of when to retire is not a clear cut deci-
sion. The point of retirement should vary from offi-
cer to officer in conjunction with his personal goals
and military career prospects. He should assess and
weigh the component parts of his goals and career
prospects .
5. Depending on the individual situation, the officer may
be foregoing up to ten years of financial security and
a larger monthly retirement benefit by early retire-
ment. His civilian employment, which is greatly
affected by his skills and the status of the economy,
is definitely less secure than continuing his military
career in most cases. However, this loss of security
may be more than compensated for by increased finan-
cial rewards and personal satisfaction.
6. In periods of economic recession or slowdown the older
military retiree has historically found it difficult
to compete for jobs against younger men with similar
93
educational backgrounds. Despite the officer's
experience in the military, employers have tended to
hire the younger man who has more current technology
and has a longer employment potential.
7. A definite career strategy should be developed years
prior to military retirement. A prime objective of
this strategy (plan) should be to optimize the offi-
cer's qualifications for civilian employment after
retirement. Implementation of this plan will benefit
the officer's military career while increasing his
civilian employability . This plan should review his
potential civilian employment opportunities, identi-
fy career and personal goals, identify his financial
needs, define his military experience and skills in
civilian terms, and foirmulate a systematic course of
action to attain his future goals.
Our goal has been to provide an insight into the pertinent
factors an officer should consider when planning his military
career, military retirement, and his subsequent civilian
career. The emphasis has been on the individual officer
tailoring his retirement decision to his personal needs and
goals. No attempt has been made to lead the officer to a
particular decision. The importance of early and continual
career planning has emerged throughout this study.
If an officer expects to make an intelligent decision re-
garding military retirement and future life, he must identify
and consider all the factors which influence that decision.
Each factor must be assigned a weight or relative measure of
94
importance which reflects its particular significance. Each
factor must also be considered as just one of numerous ele-
ments comprising the individual's career strategy. It is up
to the individual to identify and weigh those factors rele-
vant to his personal and individual situation and to act ac-
cordingly.
95
APPENDIX A
A. BASIC PRESENT VALUE COMPUTATIONS
Present value formulations include two concepts:
1. Present value of $1.
2. Present value of an annuity of $1.
B. PRESENT VALUE OF $1
To compute the present value of $1 to be received in the
future, the $1 is subjected to compound discounting for "n"
periods at interest rate "i." The applicable formula is:
P = . (1)
(1 + 1)
The present value of $1 to be received seven years hence
at an annual interest rate of 5% is computed as follows:
P = =■ = y = = .71068
(1 + .05)^ (1.05)^ 1.40709
Determination of the present value of a sum to be received
at some future time can be accomplished by multiplying the
amount in question by the applicable present value of $1.
For example, to determine the present value of $1000 to
be received seven years hence at 5%, all that is required is
to multiply $1000 by the .7107 obtained above. The following
formula may also be used:
P = ^— ^ (2)
(1 + i)
96
where "A" represents the future amount to be received. Using
either method the identical result of $710.68 is obtained.
C. PRESENT VALUE OF AN ANNUITY OF $1
The present value of an annuity of $1 is the value now
of a series of equal amounts (Rents) to be received each
period for some specified number of periods in the future.
To compute the present value of an annuity of $1 to be re-
ceived "n" periods into the future at interest rate "i," the
following formula applies:
1 1
P = n_LlL_ (3)
The present value of $1 to be received each year for
seven years at 5% is computed as follows:
1 -1
(1.05)"^ 1 - .71068 _ .28932 _ ^ ^^^.
^ = 705 705 r05 5.7864
Determination of the present value an amount (Rent) to
be received each period for "n" periods into the future may
be accomplished by multiplying the Rent in question by the
applicable present value of $1. The following formula ap-
plies :
(4)
where "R" represents the Rent to be received per period.
The present value of $1,000 received each year for seven
years at 5% is computed as follows:
97
P = $1,000\ Q^'^^^ j= $1,000(5.7864) = $5,786.40
D. CONTINUOUS COMPOUNDING
For purposes of this thesis the authors decided to util-
ize continuous compounding, hence continuous discounting, for
all present value computations. Past studies conducted on
related topics have generally utilized annual or something
less than continuous discounting, hence we hoped to achieve
a slightly different point of view. The overall effect of
continuous vs. a more infrequent discounting period is resul-
tant larger numbers.
Given continuous discounting, it can be shown that e
represents the present value of $1 due n periods hence.
[Bowen, p. 300] It can also be shown that the present value
of an annuity is represented by the formula:
P = r( ^ - ,^""^ 1. (5)
In order to apply the above formula to monthly periods,
it is necessary to convert the yearly interest rate to a
monthly rate and to express "n" in months. Conversion to a
monthly interest rate can be accomplished by dividing the
yearly rate by twelve. Thus, an annual interest rate of 6%
(.06) becomes .005.
Formula (5) is utilized in the computation of Tables V,
VI, XI, XII, XIII, and XIV. The specific use of formula (5)
in the model for each set of tables is set forth in the
following discussion.
98
E. TABLES V AND VI
Tables V and VI feature the present value of the total
future retired pay computed at the twenty year point. If an
officer were to retire at some point in excess of twenty years,
that period of time between twenty years and the actual time
of retirement could not be included in present value computa-
tions because retirement pay would not be received during
that gap. Formula (5) is designed such that it accounts for
rents to be received from the present into the future without
any gaps. Therefore, a method must be developed to account
for the gaps which occur between twenty years and actual re-
tirement.
This is easily accomplished by determining the present
value of the total retirement income as if the officer had
retired at twenty years and then subtracting from this the
present value of the amount of retired pay computed over the
gap between twenty years and actual retirement. The equation
is :
/ 1 -in \ /i - Q~^^*\
^^MRP " MMRpI i-^:^^^ j - MMRpI . ) (6)
where
PV..„^ = Present value of military retired pay
MRP -^
MMRP = Monthly military retired pay
i = Monthly interest rate
n = Total number of months until mortality
n* = Number of months until retired pay begins
99
F. TABLEX XI AND XII
Tables XI and XII feature the present value of the total
future income stream (PVTFIS) . The PVTFIS is determined by
adding the present value (PV) of the following income sources:
AP = Active Duty Military Pay
MRP = Military Retirement Pay
SCP = Second Career Pay
SCRP = Second Career Retirement Pay
The model may be presented in the following form:
PVTFIS = PV + PV + PV + PV
AP MRP SCP SCRP
The present value of the various income sources are deter-
mined in the following manner.
Present Value of the Active Duty Pay (PV )
The PVAP is equal to the present value of the monthly
active duty pay at the given discount rate for the number of
months received. The equation is:
PV^p = MAp(l^X^) (7)
where
MAP = Monthly AP
n = Number of months active duty pay is received.
G. PRESENT VALUE OF MILITARY RETIRED PAY (PVMRP)
The PVMRP was previously discussed and may be represented
by equation (6) :
100
1 - e-^^ \ .„_ / 1 - e-^^*
PV^j^ = MMRP I j^ / - MMRP I ^^ / . (6)
H. PRESENT VALUE OF SECOND CAREER PAY (PVSCP)
The PVSCP is determined in much the same manner as is the
PVMRP because the second career pay is also subjected to gaps
when second career income begins at any point beyond twenty
years of active service. The equation is:
/ , -in \ / 1 _ -in** \
P^scP = «SCP [^^-f j - MSCP (:L— f ] (8)
where :
MSCP = Monthly SCP
n = Number of months until age 65
n** = Number of months until second career income begins
I. PRESENT VALUE OF SECOND CAREER RETIRED PAY (PVSCRP)
The PVSCRP is also determined in much the same way as is
the PVMRP and the PVSCP because the SCRP must always begin at
a point beyond twenty years of active service. This point is
assumed to be age 65 for this analysis. The SCRP is further
assumed to be paid from age 6 5 until mortality. The equation
is:
^VrP = "^=^^ ( ^ "l^ " ) - "SCRP ( ^ ' ^'" j (9)
where :
MSCRP = Monthly SCRP
n = Number of months until mortality
101
n
*** —
Number of months until SCRP begins
J. SAMPLE COMPUTATION
A sample computation will serve to demonstrate how the
model functions. The sample computation is based on an 0-6
who retired after 26 years of active service at a discount
rate of 5%:
PV^„ = MAP
AP
{-^)-
$195,898
where:
i = .00416. . .
n = 84 months
PV^_^ = MMRPI i— ^
MRP V 1
-in
- MMRP
(-^)
$263,358
$96,851 = $166,507
where :
n = 2 92.8 months
n* = 7 2 months
PVgcp = MSCP
(i^^)-MSCp(^^f^)
$228,507
$107,550 = $120,957
where:
n = 19 2 months
n** = 72 months
102
PVgcRp = MSCRP
(-4:ii)-..„(L^4:^)
$46,853 - $36,609 = $10,244
where:
n = 292.8 months
n*** = 192 months
PVTFIS = $493,606
K. TABLES XIII AND XIV
Tables XIII and XIV utilize present value formulas in
the computation of the present value of the difference between
retired pay received by early vs. late retirees. The present
value is computed from the point of late retirement until
mortality. There are no gaps in the time span over which
the retirement pay difference will be received, hence the
basic formula (5) may be used in the following form:
PVD = MDRP
{^)
where:
PVD = Present value of the difference in retired pay
MDRP = Monthly difference in retired pay
n = Number of months from late retirement point until
mortality
103
APPENDIX B
EXPECTED VALUE
We can investigate the PVTFIS associated with promotion
from 0-5 to 0-6 through the application of an expected value
analysis. As an example we will assume a hypothetical 0-5
decides to remain on active duty until he has completed a
minimum of 22 years. During this time he will have been con-
sidered for promotion to 0-6 by at least one selection board.
If this 0-5 is selected for promotion to 0-6, he will remain
on active duty until completion of 24 years and then retire.
If he is not selected for promotion to 0-6, he will retire
after 22 years are completed. We will also assume this 0-5
has a .476 probability of promotion to 0-6. This particular
probability is derived from the promotion opportunity percent-
age resulting from the FY76 selection board for the 1310 and
1110 designators. Although the promotion opportunity percent-
age and the probability of promotion are not the same, for
computational purposes we shall assume they are.
The expected PVTFIS (E [PVTFIS]) of the 0-5 in question
can now be expressed as the PVTFIS of an 0-6 retiring after
24 years multiplied (weighted) by the probability of promo-
tion to 0-6 plus the PVTFIS of an 0-5 who retires after 22
years multiplied by the probability of nonselection to 0-6
(1-probability of selection) . In equation form:
104
E[PVTFIS] = (.476) • (PVTFIS^_ after 24) +
06
(.524) • (PVTFIS after 22).
Substituting values from Table XI, the equation becomes
E[PVTFIS] = (.476) . ($512,000) + ( . 524 ) • ($482 , 000)
= $496,280.
The hypothetical 0-5 in our discussion can now employ, in
his retirement decision process, a number which takes his
probability of promotion to 0-6 into consideration. If he
were at the 21 year point, he might very well choose to stay
on active duty for one more year because the expected PVTFIS
of remaining for that additional year is greater than the
PVTFIS associated with retirement after 21 or 22 years. It
is true that the 0-5 may fail selection to 0-6 and therefore
anticipate a PVTFIS of $482,000. But it is also true that he
may be selected to 0-6 and anticipate a PVTFIS of $512,000.
The expected value analysis allows this 0-5 (and any actual
officer) to take the probability of each event's occurrence
into consideration and therefore make a more rational deci-
sion.
105
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109
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Thesis
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The question of re-
tirement: an examina-
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